TREDEGAR CORP 10-Q

Item 1. Financial Statements. Tredegar Corporation Condensed Consolidated Balance Sheets (In Thousands, Except Share Data) (Unaudited) March 31, December 31, 2023 2022 Assets Current assets: Cash and cash equivalents $ 15,025 $ 19,232 Accounts and other receivables, net 89,104 84,544 Income taxes recoverable 967 733 Inventories 113,633 127,771 Prepaid expenses and other 10,011 10,304 Total current assets 228,740 242,584 Property, plant and equipment, at cost 537,862 531,921 Less: accumulated depreciation ( 350,896 ) ( 345,510 ) Net property, plant and equipment 186,966 186,411 Right-of-use leased assets 13,854 14,021 Identifiable intangible assets, net 11,207 11,690 Goodwill 70,608 70,608 Deferred income taxes 11,662 13,900 Other assets 3,137 2,879 Total assets $ 526,174 $ 542,093 Liabilities and Shareholders’ Equity Current liabilities: Accounts payable $ 92,275 $ 114,938 Accrued expenses 21,904 31,603 Lease liability, short-term 2,186 2,035 Income taxes payable 226 1,137 Total current liabilities 116,591 149,713 Lease liability, long-term 12,458 12,738 Long-term debt 155,000 137,000 Pension and other postretirement benefit obligations, net 35,377 35,046 Other non-current liabilities 5,139 5,834 Total liabilities 324,565 340,331 Shareholders’ equity: Common stock, no par value (issued and outstanding 33,970,282 shares at March 31, 2023 and 34,000,642 shares at December 31, 2022) 59,423 58,824 Common stock held in trust for savings restoration plan ( 114,741 shares at March 31, 2023 and 113,316 shares at December 31, 2022) ( 2,203 ) ( 2,188 ) Accumulated other comprehensive income (loss): Foreign currency translation adjustment ( 84,959 ) ( 86,079 ) Gain (loss) on derivative financial instruments ( 1,211 ) ( 2,480 ) Pension and other postretirement benefit adjustments ( 56,749 ) ( 59,036 ) Retained earnings 287,308 292,721 Total shareholders’ equity 201,609 201,762 Total liabilities and shareholders’ equity $ 526,174 $ 542,093 See accompanying notes to the condensed consolidated financial statements. 2 Tredegar Corporation Condensed Consolidated Statements of Income (Loss) (In Thousands, Except Per Share Data) (Unaudited) Three Months Ended March 31, 2023 2022 Revenues and other items: Sales $ 191,122 $ 236,566 Other income (expense), net 280 ( 302 ) 191,402 236,264 Costs and expenses: Cost of goods sold 159,525 183,260 Freight 6,043 8,081 Selling, general and administrative 19,006 21,282 Research and development 1,205 1,525 Amortization of identifiable intangibles 503 663 Pension and postretirement benefits 3,418 3,476 Interest expense 2,311 786 Asset impairments and costs associated with exit and disposal activities, net of adjustments 69 ( 9 ) Total 192,080 219,064 Income (loss) before income taxes ( 678 ) 17,200 Income tax expense (benefit) 331 778 Net income (loss) $ ( 1,009 ) $ 16,422 Earnings (loss) per share: Basic $ ( 0.03 ) $ 0.49 Diluted $ ( 0.03 ) $ 0.49 Shares used to compute earnings (loss) per share: Basic 33,895 33,654 Diluted 33,895 33,696 See accompanying notes to the condensed consolidated financial statements. 3 Tredegar Corporation Condensed Consolidated Statements of Comprehensive Income (Loss) (In Thousands) (Unaudited) Three Months Ended March 31, 2023 2022 Net income (loss) $ ( 1,009 ) $ 16,422 Other comprehensive income (loss): Unrealized foreign currency translation adjustment (net of tax expense of $ 436 in 2023 and net of tax expense of $ 728 in 2022) 1,120 5,536 Derivative financial instruments adjustment (net of tax expense of $ 836 in 2023 and net of tax expense of $ 2,916 in 2022) 1,269 5,930 Amortization of prior service costs and net gains or losses (net of tax expense of $ 637 in 2023 and net of tax expense of $ 712 in 2022) 2,287 2,538 Other comprehensive income (loss) 4,676 14,004 Comprehensive income (loss) $ 3,667 $ 30,426 See accompanying notes to the condensed consolidated financial statements. 4 Tredegar Corporation Condensed Consolidated Statements of Cash Flows (In Thousands) (Unaudited) Three Months Ended March 31, 2023 2022 Cash flows from operating activities: Net income (loss) $ ( 1,009 ) $ 16,422 Adjustments for noncash items: Depreciation 6,340 5,829 Amortization of identifiable intangibles 503 663 Reduction of right-of-use lease asset 551 500 Deferred income taxes 411 552 Accrued pension and post-retirement benefits 3,418 3,506 Stock-based compensation expense 186 1,295 Gain on investment in kaléo ( 262 ) — Changes in assets and liabilities: Accounts and other receivables ( 4,320 ) ( 24,351 ) Inventories 14,840 ( 12,622 ) Income taxes recoverable/payable ( 1,156 ) ( 8,791 ) Prepaid expenses and other 1,816 3,323 Accounts payable and accrued expenses ( 28,977 ) 10,384 Lease liability ( 558 ) ( 547 ) Pension and postretirement benefit plan contributions ( 154 ) ( 50,158 ) Other, net ( 737 ) ( 742 ) Net cash (used in) provided by operating activities ( 9,108 ) ( 54,737 ) Cash flows from investing activities: Capital expenditures ( 9,025 ) ( 5,086 ) Proceeds from the sale of kaléo 262 — Net cash (used in) provided by investing activities ( 8,763 ) ( 5,086 ) Cash flows from financing activities: Borrowings 37,250 109,500 Debt principal payments ( 19,250 ) ( 51,250 ) Dividends paid ( 4,419 ) ( 4,059 ) Other — ( 396 ) Net cash provided by (used in) financing activities 13,581 53,795 Effect of exchange rate changes on cash 83 1,155 Increase (decrease) in cash & cash equivalents ( 4,207 ) ( 4,873 ) Cash and cash equivalents at beginning of period 19,232 30,521 Cash and cash equivalents at end of period $ 15,025 $ 25,648 See accompanying notes to the condensed consolidated financial statements. 5 Tredegar Corporation Condensed Consolidated Statements of Shareholders’ Equity (In Thousands, Except Share and Per Share Data) (Unaudited) The following summarizes the changes in shareholders’ equity for the three month period ended March 31, 2023: Common Stock Retained Earnings Trust for Savings Restoration Plan Accumulated Other Comprehensive Income (Loss) Total Shareholders’ Equity Balance January 1, 2023 $ 58,824 $ 292,721 $ ( 2,188 ) $ ( 147,595 ) $ 201,762 Net income (loss) — ( 1,009 ) — — ( 1,009 ) Foreign currency translation adjustment — — — 1,120 1,120 Derivative financial instruments adjustment — — — 1,269 1,269 Amortization of prior service costs and net gains or losses — — — 2,287 2,287 Cash dividends declared ($ 0.13 per share) — ( 4,419 ) — — ( 4,419 ) Stock-based compensation expense 853 — — — 853 Repurchase of employee common stock for tax withholdings ( 254 ) — — — ( 254 ) Tredegar common stock purchased by trust for savings restoration plan — 15 ( 15 ) — — Balance March 31, 2023 $ 59,423 $ 287,308 $ ( 2,203 ) $ ( 142,919 ) $ 201,609 The following summarizes the changes in shareholders’ equity for the three month period ended March 31, 2022: Common Stock Retained Earnings Trust for Savings Restoration Plan Accumulated Other Comprehensive Income (Loss) Total Shareholders’ Equity Balance at January 1, 2022 $ 55,174 $ 281,187 $ ( 2,135 ) $ ( 149,504 ) $ 184,722 Net income (loss) — 16,422 — — 16,422 Foreign currency translation adjustment — — — 5,536 5,536 Derivative financial instruments adjustment — — — 5,930 5,930 Amortization of prior service costs and net gains or losses — — — 2,538 2,538 Cash dividends declared ($ 0.12 per share) — ( 4,059 ) — — ( 4,059 ) Stock-based compensation expense 1,175 — — — 1,175 Repurchase of employee common stock for tax withholdings ( 396 ) — — — ( 396 ) Tredegar common stock purchased by trust for savings restoration plan — 13 ( 13 ) — — Balance at March 31, 2022 $ 55,953 $ 293,563 $ ( 2,148 ) $ ( 135,500 ) $ 211,868 See accompanying notes to the condensed consolidated financial statements. 6 TREDEGAR CORPORATION NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. BASIS OF PRESENTATION In the opinion of management, the accompanying condensed consolidated financial statements of Tredegar Corporation and its subsidiaries (“Tredegar,” “the Company,” “we,” “us” or “our”) contain all adjustments necessary to state fairly, in all material respects, Tredegar’s condensed consolidated financial position as of March 31, 2023, the condensed consolidated results of operations for the three months ended March 31, 2023 and 2022, the condensed consolidated cash flows for the three months ended March 31, 2023 and 2022, and the condensed consolidated changes in shareholders’ equity for the three months ended March 31, 2023 and 2022, in accordance with U.S. generally accepted accounting principles (“GAAP”). All such adjustments, unless otherwise detailed in the notes to the condensed consolidated financial statements, are deemed to be of a normal, recurring nature. The Company operates on a calendar fiscal year except for the Aluminum Extrusions segment, which operates on a 52/53-week fiscal year basis. As such, the fiscal first quarter for 2023 and 2022 for this segment references 13-week periods ended March 26, 2023 and March 27, 2022, respectively. The Company does not believe the impact of reporting the results of this segment as stated above is material to the consolidated financial results. The Company may fund or receive cash from the Aluminum Extrusions segment based on Aluminum Extrusion’s cash flows from operations during the intervening period from Aluminum Extrusion’s fiscal quarter end and the Company’s fiscal quarter end. There was no intercompany funding with Aluminum Extrusions between March 26, 2023 and March 31, 2023. The condensed consolidated financial statements as of December 31, 2022 that is included herein was derived from the audited consolidated financial statements provided in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 (“2022 Form 10-K”) but does not include all disclosures required by GAAP. These financial statements should be read in conjunction with the consolidated financial statements and related notes included in the 2022 Form 10-K. The results of operations for the three months ended March 31, 2023, are not necessarily indicative of the results to be expected for the full year. Impairment of Goodwill and Long-Lived Assets The Company assesses goodwill for impairment when events or circumstances indicate that the carrying value may not be recoverable, or, at a minimum, on an annual basis (December 1st of each year). In addition, the Company reviews long-lived assets for possible impairment when events indicate that an impairment may exist. As of March 31, 2023, the Company’s reporting units with goodwill were Surface Protection in PE Films and Futura in Aluminum Extrusions. No events or circumstances were identified during the first quarter of 2023 that indicate that it is not more likely than not that the fair values of each reporting unit was less than its carrying amount. The valuation of both goodwill and long-lived assets depends on a variety of factors, including macroeconomic conditions, industry and market considerations, cost factors and overall financial performance. Failure to successfully achieve projections could result in future impairments. Furthermore, impairment to the Surface Protection reporting unit, which is also the asset group, may be caused by factors outside the Company’s control, such as increasing competitive pricing pressures, weak consumer electronic market demand, lower than expected sales and profit growth rates, and various other factors. Consumer demand for electronics has significantly softened, causing manufacturers in the supply chain to experience reduced capacity utilization and inventory corrections. In addition, these market conditions are adversely impacting mix through reduced sales to Surface Protection’s highest value-added customers and products. Given the uncertain demand for Surface Protections products, it is reasonably possible that the cash flow estimates used in deriving such impairment valuations may change in the future. As of March 31, 2023, the Surface Protection reporting unit had goodwill of $ 57.3 million and long-lived identifiable assets of $ 28.5 million. Accounting Standards Adopted No Accounting Standard Updates issued by the Financial Accounting Standards Board were adopted during the first quarter of 2023. 7 2. ACCOUNTS AND OTHER RECEIVABLES As of March 31, 2023 and December 31, 2022, accounts receivable and other receivables, net include the following: March 31, December 31, (In thousands) 2023 2022 Customer receivables $ 88,907 $ 83,667 Other receivables 2,858 3,874 Total accounts and other receivables 91,765 87,541 Less: Allowance for bad debts ( 2,661 ) ( 2,997 ) Total accounts and other receivables, net $ 89,104 $ 84,544 3. INVENTORIES The components of inventories are as follows: (In thousands) March 31, 2023 December 31, 2022 Finished goods $ 33,033 $ 34,686 Work-in-process 16,585 15,604 Raw materials 44,113 58,262 Stores, supplies and other 19,902 19,219 Total $ 113,633 $ 127,771 4. PENSION AND OTHER POSTRETIREMENT BENEFITS Tredegar sponsors a noncontributory defined benefit (pension) plan covering certain current and former U.S. employees. As of January 31, 2018, the plan no longer accrued benefits associated with crediting employees for service, thereby freezing all future benefits under the plan. On February 10, 2022, Tredegar announced the initiation of a process to terminate and settle its frozen defined benefit pension plan. In connection therewith, on February 9, 2022, the Company contributed $ 50 million to the pension plan (the “Special Contribution”). The Company estimates that, with the Special Contribution, there will be no required minimum contributions to the pension plan until final settlement. Tredegar also has a non-qualified supplemental pension plan covering certain employees. Effective December 31, 2005, further participation in this plan was terminated and benefit accruals for existing participants were frozen. Pension expense recognized for this plan was immaterial in the first quarter of 2023 and 2022, respectively. This information has been included in the pension benefit table below. The components of net periodic benefit cost for the pension and other postretirement benefit programs reflected in the condensed consolidated statements of income for the three months ended March 31, 2023 and 2022, are shown below: Pension Benefits Other Post-Retirement Benefits Three Months Ended March 31, Three Months Ended March 31, (In thousands) 2023 2022 2023 2022 Service cost $ — $ — $ 3 $ 5 Interest cost 3,027 2,225 71 51 Expected return on plan assets ( 2,607 ) ( 2,055 ) — — Amortization of prior service costs, (gains) losses and net transition asset 2,983 3,284 ( 59 ) ( 34 ) Net periodic benefit cost $ 3,403 $ 3,454 $ 15 $ 22 Pension and other postretirement liabilities were $ 36.1 million and $ 35.7 million at March 31, 2023 and December 31, 2022, respectively ($ 0.7 million included in “Accrued expenses” at March 31, 2023 and December 31, 2022, respectively, with the remainder included in “Pension and other postretirement benefit obligations, net” in the condensed consolidated balance sheets). Tredegar funds its other postretirement benefits on a claims-made basis; for 2023, the Company anticipates the amount will be consistent with amounts paid for the year ended December 31, 2022, or approximately $ 0.5 million. 8 5. OTHER INCOME (EXPENSE), NET Other income (expense), net consists of the following: Three Months Ended March 31, (In thousands) 2023 2022 Gain on investment in kaléo (a) $ 262 $ — COVID-19-related expenses, net of relief (b) — ( 212 ) Other 18 ( 90 ) Total $ 280 $ ( 302 ) (a) In January 2023, additional cash consideration of $ 0.3 million was received related to the customary post-closing adjustments on the sale of the investment in kaleo, Inc ("kaléo"), which was sold in December 2021. (b) Costs associated with operating under COVID-19 conditions include employee overtime expenses associated with absenteeism, personal protective equipment supplies and facility maintenance. 6. EARNINGS PER SHARE Basic earnings per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding. Diluted earnings per share is computed by dividing net income (loss) by the weighted average common and potentially dilutive common equivalent shares outstanding, determined as follows: Three Months Ended March 31, (In thousands) 2023 2022 Weighted average shares outstanding used to compute basic earnings per share 33,895 33,654 Incremental dilutive shares attributable to stock options and restricted stock — 42 Shares used to compute diluted earnings per share 33,895 33,696 Incremental shares attributable to stock options and restricted stock are computed under the treasury stock method using the average market price during the related period. The Company had a net loss for the three months ended March 31, 2023, so there is no dilutive impact for such shares. If the Company had reported net income for the three months ended March 31, 2023, average out-of-the-money options to purchase shares that were excluded from the calculation of incremental shares attributable to stock options and restricted stock would have been 2,642,365 . The average out-of-the-money options to purchase shares that were excluded from the calculation of incremental shares attributable to stock options and restricted stock were 2,477,708 for the three months ended March 31, 2022. 7. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) The changes in accumulated other comprehensive income (loss) by component for the three months ended March 31, 2023. (In thousands) Foreign Currency Translation Gain (Loss) on Derivative Financial Instruments Pension & Other Postretirement Benefit Adjust Total Accumulated Other Comprehensive Income (Loss) Balance at January 1, 2023 $ ( 86,079 ) $ ( 2,480 ) $ ( 59,036 ) $ ( 147,595 ) Other comprehensive income (loss) 1,557 3,078 — 4,635 Income tax (expense) benefit ( 437 ) ( 1,087 ) — ( 1,524 ) Other comprehensive income (loss), net of tax 1,120 1,991 — 3,111 Reclassification adjustment to net income (loss) — ( 973 ) 2,924 1,951 Income tax (expense) benefit — 251 ( 637 ) ( 386 ) Reclassification adjustment to net income (loss), net of tax — ( 722 ) 2,287 1,565 Other comprehensive income (loss), net of tax 1,120 1,269 2,287 4,676 Balance at March 31, 2023 $ ( 84,959 ) $ ( 1,211 ) $ ( 56,749 ) $ ( 142,919 ) 9 The changes in accumulated other comprehensive income (loss) by component for the three months ended March 31, 2022. (In thousands) Foreign Currency Translation Gain (Loss) on Derivative Financial Instruments Pension & Other Postretirement Benefit Adjust Total Accumulated Other Comprehensive Income (Loss) Balance at January 1, 2022 $ ( 85,792 ) $ 901 $ ( 64,613 ) $ ( 149,504 ) Other comprehensive income (loss) 6,264 10,003 — 16,267 Income tax (expense) benefit ( 728 ) ( 3,190 ) — ( 3,918 ) Other comprehensive income (loss), net of tax 5,536 6,813 — 12,349 Reclassification adjustment to net income (loss) — ( 1,157 ) 3,250 2,093 Income tax (expense) benefit — 274 ( 712 ) ( 438 ) Reclassification adjustment to net income (loss), net of tax — ( 883 ) 2,538 1,655 Other comprehensive income (loss), net of tax 5,536 5,930 2,538 14,004 Balance at March 31, 2022 $ ( 80,256 ) $ 6,831 $ ( 62,075 ) $ ( 135,500 ) The amounts reclassified out of accumulated other comprehensive income (loss) related to pension and other postretirement benefits is included in the computation of net periodic pension costs, see Note 4 for additional details. 8. DERIVATIVES Tredegar uses derivative financial instruments for the purpose of hedging margin exposure from fixed-price forward sales contracts in Aluminum Extrusions and exposure from currency volatility that exists as part of ongoing business operations in Flexible Packaging Films. These derivative financial instruments are designated as and qualify as cash flow hedges and are recognized in the condensed consolidated balance sheet at fair value. If individual derivative instruments with the same counterparty can be settled on a net basis, the Company records the corresponding derivative fair values as a net asset or net liability. In the normal course of business, Aluminum Extrusions enters into fixed-price forward sales contracts with certain customers for the future sale of fixed quantities of aluminum extrusions at scheduled intervals. In order to hedge margin exposure created from the fixing of future sales prices relative to volatile raw material (aluminum) costs, Aluminum Extrusions enters into a combination of forward purchase commitments and futures contracts to acquire or hedge aluminum, based on the scheduled purchases for the firm sales commitments. The fixed-price firm sales commitments and related hedging instruments have durations generally no longer than 12 months. The notional amount of aluminum futures contracts that hedged future purchases of aluminum to meet fixed-price forward sales contract obligations was $ 27.8 million ( 18.7 million pounds of aluminum) at March 31, 2023 and $ 30.7 million ( 20.3 million pounds of aluminum) at December 31, 2022. The table below summarizes the location and gross amounts of aluminum futures contract fair values (Level 2) in the condensed consolidated balance sheets as of March 31, 2023 and December 31, 2022: March 31, 2023 December 31, 2022 (In thousands) Balance Sheet Account Fair Value Balance Sheet Account Fair Value Derivatives Designated as Hedging Instruments Asset derivatives: Aluminum futures contracts Prepaid expenses and other $ — Prepaid expenses and other $ 48 Liability derivatives: Aluminum futures contracts Accrued expenses ( 2,694 ) Accrued expenses ( 3,260 ) Aluminum futures contracts Other non-current liabilities ( 267 ) Other non-current liabilities ( 369 ) Net asset (liability) $ ( 2,961 ) $ ( 3,581 ) In the event that a counterparty to an aluminum fixed-price forward sales contract chooses not to take delivery of its aluminum extrusions, the customer is contractually obligated to compensate Aluminum Extrusions for any losses on the related aluminum futures and/or forward contracts through the date of cancellation. 10 The Company's earnings are exposed to foreign currency exchange risk primarily through the translation of the financial statements of subsidiaries that have a functional currency other than the U.S. Dollar. The Company estimates that the net mismatch translation exposure for the Flexible Packaging Film's business unit in Brazil (“Terphane Ltda.”) of its sales and raw materials quoted or priced in U.S. Dollars and its variable conversion, fixed conversion and sales, general and administrative costs (before depreciation and amortization) quoted or priced in Brazilian Real ("R$") will be an annual net cost of R$ 177 million for the full year of 2023. Terphane Ltda. has the following outstanding foreign exchange average forward rate contracts to purchase Brazilian Real and sell U.S. Dollars: USD Notional Amount (000s) Average Forward Rate Contracted on USD/BRL R$ Equivalent Amount (000s) Applicable Month Estimated % of Terphane Ltda. R$ Operating Cost Exposure Hedged $ 1,903 5.5379 R$ 10,539 Apr-23 72 % $ 1,873 5.5753 R$ 10,443 May-23 71 % $ 1,928 5.6118 R$ 10,820 Jun-23 74 % $ 2,154 5.6378 R$ 12,144 Jul-23 83 % $ 2,020 5.6831 R$ 11,480 Aug-23 78 % $ 2,071 5.7174 R$ 11,841 Sep-23 80 % $ 2,013 5.7556 R$ 11,586 Oct-23 79 % $ 2,018 5.7836 R$ 11,671 Nov-23 79 % $ 1,786 5.8312 R$ 10,414 Dec-23 71 % $ 659 5.7360 R$ 3,780 Jan-24 23 % $ 659 5.7562 R$ 3,793 Feb-24 23 % $ 659 5.7774 R$ 3,807 Mar-24 23 % $ 659 5.8000 R$ 3,822 Apr-24 23 % $ 659 5.8207 R$ 3,836 May-24 24 % $ 659 5.8419 R$ 3,850 Jun-24 24 % $ 659 5.8636 R$ 3,864 Jul-24 24 % $ 659 5.8872 R$ 3,880 Aug-24 24 % $ 659 5.9118 R$ 3,896 Sep-24 24 % $ 659 5.9350 R$ 3,911 Oct-24 24 % $ 659 5.9581 R$ 3,926 Nov-24 24 % $ 659 5.9813 R$ 3,942 Dec-24 24 % $ 25,674 5.7352 R$ 147,245 45 % These foreign currency exchange contracts have been designated and qualify as cash flow hedges of Terphane Ltda.’s forecasted sales to customers quoted or priced in U.S. Dollars over that period. By changing the currency risk associated with these U.S. Dollar sales, the derivatives have the effect of offsetting operating costs quoted or priced in Brazilian Real and decreasing the net exposure to Brazilian Real in the condensed consolidated statements of income. The table below summarizes the location and gross amounts of foreign currency forward contract fair values (Level 2) in the condensed consolidated balance sheets as of March 31, 2023 and December 31, 2022: March 31, 2023 December 31, 2022 (In thousands) Balance Sheet Account Fair Value Balance Sheet Account Fair Value Derivatives Designated as Hedging Instruments Asset derivatives: Foreign currency forward contracts Prepaid expenses and other $ 1,854 Prepaid expenses and other $ 781 Foreign currency forward contracts Other assets 422 Other assets 33 Liability derivatives: Foreign currency forward contracts Accrued expenses — Other non-current liabilities ( 3 ) Net asset (liability) $ 2,276 $ 811 11 These derivative contracts involve elements of market risk that are not reflected on the condensed consolidated balance sheet, including the risk of dealing with counterparties and their ability to meet the terms of the contracts. The counterparties to any forward purchase commitments are major aluminum brokers and suppliers, and the counterparties to any aluminum futures contracts are major financial institutions. Fixed-price forward sales contracts are only made available to the best and most credit-worthy customers. The counterparties to the Company’s foreign currency cash flow hedge contracts are major financial institutions. The pre-tax effect on net income (loss) and other comprehensive income (loss) of derivative instruments classified as cash flow hedges and described in the previous paragraphs for the three month periods ended March 31, 2023 and 2022 is summarized in the table below: Cash Flow Derivative Hedges Three Months Ended March 31, Aluminum Futures Contracts Foreign Currency Forwards 2023 2022 2023 2022 Amount of pre-tax gain (loss) recognized in other comprehensive income (loss) $ 1,402 $ 6,182 $ — $ 1,676 $ — $ 3,821 Location of gain (loss) reclassified from accumulated other comprehensive income (loss) into net income (effective portion) Cost of goods sold Cost of goods sold Cost of goods sold Selling, general & admin Cost of goods sold Selling, general & admin Amount of pre-tax gain (loss) reclassified from accumulated other comprehensive income (loss) to net income (effective portion) $ 672 $ ( 1,005 ) $ 15 $ 286 $ ( 15 ) $ ( 137 ) As of March 31, 2023, the Company expects $ 0.9 million of unrealized after-tax losses on aluminum and foreign currency derivative instruments reported in accumulated other comprehensive income (loss) to be reclassified to earnings within the next 12 months. For the three month periods ended March 31, 2023 and 2022, net gains or losses realized, from previously unrealized net gains or losses on hedges that had been discontinued, were not material. 9. INCOME TAXES Tredegar recorded tax expense of $ 0.3 million on pre-tax loss of $ 0.7 million in the first three months of 2023. Therefore, the effective tax rate in the first three months of 2023 was ( 48.8 )%, compared to 4.5 % in the first three months of 2022. The change in the effective tax rate is primarily due to a pre-tax loss in first three months of 2023 versus pre-tax income in first three months of 2022, lower Brazil tax incentives, and a large discrete benefit recorded in the first quarter of 2022, resulting from the implementation of new U.S. tax regulations associated with foreign tax credits published by the U.S. Treasury and Internal Revenue Service on January 4, 2022. These regulations overhauled various components of the foreign tax credit regime including the determination of creditable foreign taxes and limit the amount of foreign taxes that are creditable against U.S. income taxes. As the result of these regulations, future Brazilian income tax will be deductible, but not creditable, in the U.S. The accounting rules require a reduction of the U.S. deferred tax liability previously established related to anticipated future income from Brazil. The tax effect of the reduction of the U.S. deferred tax liability resulted in the discrete tax benefit described above. Total deferred tax assets declined during the first quarter of 2023 compared to December 31, 2022 primarily due to changes in other comprehensive income. Tredegar accrues U.S. federal income taxes on unremitted earnings of foreign subsidiaries where required. However, due to changes in the taxation of dividends under the U.S. Tax Cuts and Jobs Act of 2017, Tredegar will only record U.S. federal income taxes on unremitted earnings of its foreign subsidiaries where Tredegar cannot take steps to eliminate any potential tax on future distributions from its foreign subsidiaries. The Brazilian federal statutory income tax rate is a composite of 34.0 % ( 25.0 % of income tax and 9.0 % of social contribution on income). Terphane Ltda.’s manufacturing facility in Brazil is the beneficiary of certain income tax incentives that allow for a reduction in the statutory Brazilian federal income tax rate to 15.25 % levied on the operating profit on certain of its products. The incentives have been granted for a 10-year period, from the commencement date of January 1, 2015 and expiring at the end of 2024. The benefit from the tax incentives was $ 0.6 million and $ 1.5 million in the first three months of 2023 and 2022, respectively. Tredegar and its subsidiaries file income tax returns in the U.S., various states, and jurisdictions outside the U.S. With exceptions for some U.S. states and non-U.S. jurisdictions, Tredegar and its subsidiaries as of March 31, 2023 are no longer subject to U.S. federal, state or non-U.S. income tax examinations by tax authorities for years before 2018 . 12 10. BUSINESS SEGMENTS The Company’s business segments are Aluminum Extrusions, PE Films, and Flexible Packaging Films. Information by business segment is reported below. There are no accounting transactions between segments and no allocations to segments. The Company’s reportable segments are based on its method of internal reporting, which is generally segregated by differences in products. Accounting standards for presentation of segments require an approach based on the way the Company organizes the segments for making operating decisions and how the chief operating decision maker (“CODM”) assesses performance. EBITDA from ongoing operations is the key profitability measure used by the CODM (Tredegar’s President and Chief Executive Officer) for purposes of assessing financial performance. The Company uses sales less freight (“net sales”) as its measure of revenues from external customers at the segment level. This measure is separately included in the financial information regularly provided to the CODM. 13 The following table presents net sales and EBITDA from ongoing operations by segment for the three months ended March 31, 2023 and 2022: Three Months Ended March 31, (In thousands) 2023 2022 Net Sales Aluminum Extrusions $ 133,370 $ 158,110 PE Films 20,182 31,131 Flexible Packaging Films 31,527 39,244 Total net sales 185,079 228,485 Add back freight 6,043 8,081 Sales as shown in the condensed consolidated statements of income (loss) $ 191,122 $ 236,566 EBITDA from Ongoing Operations Aluminum Extrusions: Ongoing operations: EBITDA $ 14,638 $ 23,919 Depreciation & amortization ( 4,411 ) ( 4,261 ) EBIT 10,227 19,658 Plant shutdowns, asset impairments, restructurings and other ( 493 ) ( 105 ) PE Films: Ongoing operations: EBITDA 1,849 7,047 Depreciation & amortization ( 1,643 ) ( 1,595 ) EBIT 206 5,452 Plant shutdowns, asset impairments, restructurings and other 2 ( 102 ) Flexible Packaging Films: Ongoing operations: EBITDA 1,350 5,035 Depreciation & amortization ( 700 ) ( 550 ) EBIT 650 4,485 Plant shutdowns, asset impairments, restructurings and other ( 78 ) ( 43 ) Total 10,514 29,345 Interest income 44 29 Interest expense 2,311 786 Gain on investment in kaléo 262 — Stock option-based compensation costs 231 631 Corporate expenses, net 8,956 10,757 Income (loss) before income taxes ( 678 ) 17,200 Income tax expense (benefit) 331 778 Net income (loss) $ ( 1,009 ) $ 16,422 14 The following table presents identifiable assets by segment at March 31, 2023 and December 31, 2022: (In thousands) March 31, 2023 December 31, 2022 Aluminum Extrusions $ 296,861 $ 293,308 PE Films 99,725 102,431 Flexible Packaging Films 93,467 103,448 Subtotal 490,053 499,187 General corporate 21,096 23,674 Cash and cash equivalents 15,025 19,232 Total $ 526,174 $ 542,093 The following tables disaggregate the Company’s revenue by geographic area and product group for the three months ended March 31, 2023 and 2022: Net Sales by Geographic Area (a) Three Months Ended March 31, (In thousands) 2023 2022 United States $ 150,611 $ 182,138 Exports from the United States to: Asia 5,732 12,465 Latin America 1,859 1,441 Canada 4,284 4,193 Europe 860 1,363 Operations outside the United States: Brazil 21,628 26,885 Asia 105 — Total $ 185,079 $ 228,485 (a) Export sales relate mostly to PE Films. Operations in Brazil relate to Flexible Packaging Films. The Company’s facilities in Pottsville, PA (“PV”) and Guangzhou, China (“GZ”) have a tolling arrangement whereby certain surface protection films are manufactured in GZ for a fee with raw materials supplied from PV that are then shipped by GZ directly to customers principally in the Asian market, but paid by customers directly to PV. Amounts associated with this intercompany tolling arrangement are reported in the table above as export sales from the U.S. to Asia, and include net sales of $ 3.4 million and $ 6.5 million in the first three months of 2023 and 2022, respectively. 15 Net Sales by Product Group Three Months Ended March 31, (In thousands) 2023 2022 Aluminum Extrusions: Nonresidential building & construction $ 78,629 $ 80,921 Consumer durables 10,347 16,891 Automotive 12,122 13,841 Residential building & construction 11,603 16,465 Electrical 8,129 7,287 Machinery & equipment 10,724 12,945 Distribution 1,816 9,760 Subtotal 133,370 158,110 PE Films: Surface protection films 12,855 22,148 Overwrap packaging 7,327 8,983 Subtotal 20,182 31,131 Flexible Packaging Films 31,527 39,244 Total $ 185,079 $ 228,485 11. SUPPLY CHAIN FINANCING The Company has supply chain finance service agreements with third-party financial institutions to provide platforms that facilitate the ability of participating suppliers to finance payment obligations from the Company with the third-party financial institution. The Company’s obligations to its suppliers, including amounts due and scheduled payment dates, are not affected by suppliers’ decisions to finance amounts under the supply chain finance agreements. As of March 31, 2023 and December 31, 2022, $ 11.4 million and $ 25.9 million, respectively, of the Company’s accounts payable were financed by participating suppliers through third-party financial institutions. 16